Costs must be halved for wells and the annual number doubled

The State’s Direct Financial Interest (SDFI) on the Norwegian continental shelf (NCS) yielded a net cash flow of NOK 38.9 billion for the first quarter of 2014. That represents an increase of NOK 1.6 billion from the same period of last year, and primarily reflects higher oil and gas prices in Norwegian kroner. Investment during the first quarter confirms a stabilisation about 40 per cent above the level in the first quarter of 2013. Petoro wants to double the number of wells and halve their cost in order to realise the great value potential of both discoveries and existing fields in the SDFI portfolio.

Petoro AS manages the SDFI on behalf of the government. Grethe K Moen, its chief executive, notes that half the discoveries under consideration for development on the NCS are smaller than about 27 million barrels of oil equivalent.

“Developing these discoveries presents major profitability challenges,” she says. “Since drilling production wells accounts for about half the cost of a development, this represents a particularly important area for making a commitment. Corresponding challenges apply for profitable recovery of the ever-decreasing volumes in mature oil fields. To meet these challenges, we need to set ambitious targets and adopt radical measures."

Moen wants operators and partnerships to get to grips with two principal drilling issues: capacity measured by wells per year, and drilling cost. She emphasises that time equals money in drilling, and it is accordingly disturbing that standard jobs can now take twice as long as they did 20 years ago.

“Good intentions have created creeping inefficiencies over time,” she points out. “On the other hand, the industry managed to execute standard tasks in drilling operations twice as fast before. I’m confident that, through simplification, technology which increases cost effectiveness and a cultural shift away from seeking fault-free operation to pursuing efficiency, we can achieve radical efficiency gains compared with the present position.”

Moen is satisfied with the financial results for the quarter, and praises the operators for maintaining a high level of production regularity. This makes an important contribution to revenues. She is also satisfied with decisions which will influence future value creation. “We’ve participated in decisions during the first quarter which will help to maintain a very long-term revenue flow for our owner, the Norwegian state,” she says. “I’m thinking particularly of the development solution chosen for the big Johan Sverdrup field, with a robust field centre for the first development phase.”

However, the current level of investment reflects not only a high level of activity but also a cost increase which threatens the profitability of projects. Pleasure over the financial results so far this year has been marred by the recent postponement of the offshore compression project on Ormen Lange.

“We agreed that the current project couldn’t continue and that room existed for postponing compression on the field,” says Moen. “But we chose not to vote for the decision which was made, because we found that the plan put forward did not represent a sufficiently strong commitment and the resources allocated were not enough. Compression is needed to realise the value in the field. We’ll accordingly seek to influence the licence to put greater efforts into the work ahead.”

She says it is important to safeguard investment in other major projects which are exposed to increased costs and reduced profitability, pointing to constructive efforts by the operator and partners in the Snorre 2040 project as an example. However, Moen also makes the point that postponement in itself is not going to meet the cost challenge facing projects.

In the Barents Sea, a decision is due to be taken on continued work with the Johan Castberg field. The choice of development solution is affected by uncertainty because of somewhat disappointing results from the drilling campaign which was to strengthen the resource base for a project. However, results were positive from the final well of this campaign, drilled on the Drivis prospect. Petoro believes it is very important that the partnership matures both the relevant development solutions – one which lays the basis for a broader area development and for pipeline transport of oil to shore, and another solution involving a smaller floating production unit with offshore loading. Petoro wishes to retain the broader solution as the main alternative in further work.

“The way we tackle Johan Castberg will greatly influence how we can continue to develop large parts of the Barents Sea,” says Moen. “We’re a licensee in a number of Barents Sea licences, and are engaged in establishing an infrastructure which can contribute to the profitability of such developments.”